How Integrity Can Save Your Company (and the World)

Among all the complex reasons cited for why the economy has gone south, here’s one that might seem a tad simplistic: Integrity.

But almost every problem can be traced to a lack of integrity, which can determine everything from how individuals make decisions to how CEOs lead companies, according to economist and retired Harvard Business School professor Michael Jensen.

Jensen, known as one of the 1970s pioneers of “agency theory” – which is used to explain the conflicts of interest that arise when executive and shareholder interests are not aligned – has spent the last eight years studying integrity. Much of his research, along with co-author Werner Erhard, is expected to be published in the book “A Positive Theory of the Normative Virtues,” due out in 2014.

He recently spoke with The Wall Street Journal about why he thinks integrity is now more important than ever. Edited excerpts:

WSJ: What is integrity?

Jensen: People have spent thousands of years talking about integrity, and it’s gotten us nowhere. My colleague and I have spent eight years rigorously defining the concept of integrity. One reason our world is such a mess is that people see integrity as a virtue, as something that’s good and admirable. But integrity is a purely positive phenomenon, like gravity. It’s honoring one’s word.

WSJ: Why the big deal now?

Jensen: It’s always been a big deal, but the costs have been more lately.

WSJ: Why isn’t integrity a virtue?

Jensen: When you think about it as a virtue, it then occurs to you that it’s an option. When you look at integrity that way, you’re much more likely to give it up in order to gain something, like wealth, power or admiration from others. But if you take it on, you’ll find incredible things happen in your life. You become instantly trustworthy and people will become loyal. I’m not saying you should do it because it’s virtuous; you should do it because it’s in your own self interest.

WSJ: You’ve said integrity is relevant to the financial crisis. How so?

Jensen: Which scandal do you want to talk about? It’s at the core. It’s involved in millions of ways. Look at the manipulation of LIBOR. Literally, your paper [The Wall Street Journal] every day is full of the consequences of out-of-integrity behavior. And those consequences, by the way, are always bad.

Jensen: That’s not as clear. That’s a situation where something went wrong inside J.P. Morgan. Their control systems broke down; they were badly designed, implemented, and probably used for something they weren’t designed for.

WSJ: How would integrity apply to a CEO?

Jensen: For earnings, a CEO should say, ‘If I give you all the evidence that our earnings are $500 million, you will come to the same conclusion.’ It eliminates all kind of gaming. When you behave this way, people will end up trusting you.

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Written and edited by The Wall Street Journal’s Management & Careers group, At Work covers life on the job, from getting ahead to managing staff to finding passion and purpose in the office. Tips, questions? email us.